Employers and trade unions agree on increase in insurance contributions for 2011

On 24 September 2010, the social partners agreed specific base rates for the calculation of social security contributions in 30 sectors. However they failed to agree on rates for 44 sectors, and here the Bulgarian government will impose a base-rate increase of 5.6%, equal to the lowest rate agreed in other sectors. The deal is expected to result in an overall increase in revenue for the National Social Insurance Institute of around €56 million (BGN 110 million).

New social security thresholds

Specific occupational base rates for calculation of social security contributions were introduced in 2003 by the Bulgarian parliament. These social insurance thresholds (BG0307101F) were brought in to counter the practice of employers calculating workers’ contributions on the basis of the minimum wage, even if the employee’s real wage was much higher. The new thresholds agreed by the social partners in September 2010, after nearly two months of negotiations, should increase pay and social security contributions for about 2.3 million workers.

What social partners agreed

Overall, the social partners agreed on thresholds for 30 sectors. However, as negotiations were unsuccessful for the remaining 44 sectors, the government will introduce a base-rate increase of 5.6% for calculating social security thresholds.

  • The highest increase of thresholds was in tourism and hotels (12.5%), trade (10.2%), paper (9.7%), forestry (7.4%), agriculture (7.2%) and clothing manufacture (7%).
  • In the other sectors, the thresholds were increased by between 0% and 2%.
  • In key sectors such as metallurgy, chemistry, transport, telecommunications, food and the brewing industry agreements were not reached, with their minimum thresholds remaining at the 2010 level.

Overall, it appears that the largest increases were in those branches where there is a widespread practice of undeclared work or informal economy. This is because employers and trade unions wanted to suppress unfair competition from businesses that fail to pay social contributions above the minimum wage levels, and to narrow the discrepancy between real wages and the amounts used to calculate contributions.

In industries that have been particularly hard-hit by the crisis, either no increase or a minimal increase of thresholds was introduced, because of fears that rising labour costs may force employers to cut jobs.

Conflict over increase

After the negotiations ended, the Minister of Labour and Social Policy, Totyo Mladenov, announced the decision to impose an ‘administrative increase’ on 44 sectors equal to the average rate of increase in industries which did secure an agreement.. The government has done this since 2003, but it suspended the practice in 2009 because of the financial crisis. Even though the average increase negotiated in 2009 was 4.85%, the administrative increase only corrected the rates in other branches for expected inflation (2.2%). The employer organisations demanded that the same practice be applied this year, so that the growth in the contribution thresholds in 2011 should be a maximum 3.7% instead of 5.6%. They warned that the ‘artificial’ increase of thresholds will raise labour costs and lead to higher unemployment as well as a growth of the informal economy. Minister Mladenov, however, chose to ignore these arguments. The government is forecasting a significant growth in gross domestic product (GDP) for the year, while the dire financial state of its social security fund necessitates an increase in contribution rates.

New agreement for self-employed workers

Unions, employers and the government also agreed on the need to introduce differentiated minimum social security thresholds for self-employed people since it is not logical that a shoemaker, a hairdresser, a lawyer or a private dentist should all be insured at a uniform minimum income. Since the beginning of 2010 the minimum income for calculating social security contributions in this group was increased from €133 to €215 (BGN 260 to BGN 420). Only farmers and tobacco producers pay contributions on a different threshold – €122 (BGN 240). Experts from the National Revenue Agency (NAP) and the National Statistical Institute (NSI) are working on developing the new thresholds, expected to be introduced in early 2011.

Commentary

The practice of calculating differential minimum social security thresholds was introduced in 2003 in order to increase revenues and combat the informal economy. The experience to date, however, suggests mixed results. It has certainly helped the government to collect contributions more efficiently, at least on the minimum threshold level, but many trade unionists and employers are doubtful of the effectiveness of this measure in regulating the labour market. The thresholds do not eliminate employers’ obligation to insure employees on the actual amount of their gross wage, but allows them to pay lower contributions based on the minimum threshold, and to do it with the consent of workers. Finding a threshold acceptable to companies that would otherwise not pay contributions at all, and at the same time not harm workers is a very difficult exercise. This is especially so given the high incidence of undeclared work and substantial differences in the financial status of individual companies.

Lyuben Tomev, Institute for Social and Trade Union Research (ISTUR)

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